Shuffling the deck-chairs leaves key issues unresolved

by Peter Westmore

News Weekly, July 10, 2010

The political execution of the former Prime Minister, Kevin Rudd, has been followed by hagiographic accounts of the rise and rise of Julia Gillard, whom the Canberra press gallery have apparently anointed as the messiah who will lead Australia into the promised land, as they did for Kevin Rudd until a few months ago.

Whether media endorsement of her as Australia's first female Prime Minister and Ms Gillard's attempts to distance her government from the legacy of the Rudd years, convince a sufficient number of people to abandon their critical faculties in the run-up to the next election, only time will tell.

What cannot be doubted is that the financial challenges Australia faces - as a result of both government extravagance and the surging foreign debt - remain largely unacknowledged and therefore unresolved.

The Opposition has rightly pointed to the blow-out of government debt over the past three years; but the growth of Australia's net foreign debt goes back to the Hawke Government, and has now reached a level where it will depress Australia's standard of living in the future, if not put Australia's economic sovereignty at risk.

Mounting debt

When the Hawke Government took office in 1983, Australia's net foreign debt was about $20 billion. Hawke's Treasurer Paul Keating deregulated the financial system, and removed most of the controls on capital flows into and out of the country.

When John Howard defeated Paul Keating in 1997, the Liberals campaigned against the unsustainable growth in the foreign debt, which had risen to $180 billion. When John Howard lost government to "Kevin '07", the foreign debt had soared to about $580 billion.

The Australian Bureau of Statistics' latest figures show that Australia's net foreign debt had risen to $654 billion by the March quarter of 2010.

There is no doubt that the apparent prosperity which Australia has experienced over the past 20 years has been due, in significant part, to increased foreign borrowings, which have supported a higher standard of living.

But this debt is rising to a level which threatens Australia's future prosperity, by requiring an increasing proportion of Australia's export income to be used to service the foreign debt, making Australia more vulnerable to external economic shocks.

Within Australia, there has been widespread complacency over the growth of the foreign debt, just as there was complacency over the stability of financial markets prior to the global financial crisis.

For years, the Treasury and Reserve Bank have assured politicians that private debt was not a matter of concern to governments. For their part, politicians welcomed the apparent prosperity caused by the massive expansion of credit. And economists found that there were a number of countries in Europe whose level of indebtedness was greater than ours, therefore justifying the massive growth in Australia's foreign debt.

But if the global financial crisis has taught us anything, it is to beware of self-serving economic dogmas.

Additionally, the question must be asked as to who is lending to Australia? Historically, the lenders have been from the United States, the UK and Japan. But after the financial crisis, the US and the UK have been importing capital. In the future, Australia's imported capital will come from those nations with substantial trade surpluses, i.e., the Arab oil-producers, Japan and, increasingly, China.

As Professor Ian Harper, a director of Access Economics, wrote recently, "The complexion of foreign investment in Australia is changing. Firstly, an increasing share of foreign investment will come from China. And the Chinese don't necessarily see the distinction between political and commercial activity in the same way we do."

Australia runs the risk that it will lose the capacity to determine its own future, by suffering economic conquest or, more likely, by gradually falling into the sphere of influence of China, now our largest trading partner. While this influence is clearly economic, the Beijing regime, as Professor Harper hinted, does not draw distinctions between economics and politics.

Over the past decade, China has been amassing huge trade surpluses, arising from exports by Chinese corporations. Most of these are financial entities controlled by the Chinese Communist Party.

As a relatively small economy, Australia is highly vulnerable to a Beijing takeover of its world-class mining industry, as well as agricultural land and property in its capital cities. The regime will most likely attempt to influence Australian foreign policy away from its historic Western alliances, towards an accommodation with Beijing, as it has done elsewhere in the world.

The rise in Australia's net foreign debt, and its government debt which is expected to rise to $150 billion in four years time - largely funded by foreign capital - puts Australia's sovereignty at risk.